There's been considerable parliamentary debate, media coverage and public discussion about debt during recent years. Much of the focus has been on government debt, and government debt levels have been well publicised. However, governments are not the only sector contributing to the Australian economy.

This article looks at how Australian households have accumulated debt over the past 25 years during a period of rising household income, rising property prices, and decreasing housing interest rates. Using national accounts data, a range of analytical measures have been used to provide a fuller picture of household debt in Australia.

MEASURES OF HOUSEHOLD DEBT

Average amount owed

Total household debt stood at $1.84 trillion at the end of 2013, equivalent to $79,000 for every person living in Australia at that time. This was higher than it had been at any time in the previous 25 years, even after making adjustments to remove the effect of general price inflation (thereby giving a 'real' comparison).

The rate of increase in real household debt per person has slowed since the onset of the Global Financial Crisis (GFC) in August 2007. After increasing at an average of 10% per year between mid 2001 and mid 2007, real household debt per person rose at the much slower average annual rate of 2% between mid 2007 and the end of 2013. This slowdown may, in part, reflect the tightening in mortgage lending standards after 2008.1

Rising household debt has been only partly matched by the increase in the value of household assets. Over the past 25 years, household debt has increased nearly twice as fast as the value of household assets. Expressed as a percentage of the value of household assets, household debt increased from just under 11% at the end of September 1988 to nearly 21% at the end of 2011, before easing a little to below 20% at the end of 2013.

SIZE OF HOUSEHOLD DEBT COMPARED WITH ASSETS(a)(a) Household debt to asset ratio (e.g. at the end of 2013, the value of households debt was equivalent to 19.6% of the value of households assets).Source: Australian National Accounts: Financial Accounts, December Quarter 2013 (ABS cat. no. 5232.0)

Income is an important consideration when deciding on a household's capacity to make loan repayments in full and on time. Household debt increased more rapidly than household income from early in 1993 until the middle of 2007. Since mid 2007 (and the GFC), household debt has tended to rise in line with household income. At the end of 2013, the amount that households owed was nearly 1.8 times the amount of disposable income households received during 2013.

SIZE OF HOUSEHOLD DEBT COMPARED WITH ANNUAL INCOME(a)(b)(a) Gross disposable household income received during the previous year.(b) Household debt to income ratio (e.g. at the end of 2013, the value of households debt was almost 1.8 times the amount of gross disposable income received by households during 2013).Source: Australian National Accounts: Financial Accounts, December Quarter 2013 (ABS cat. no. 5232.0); Australian National Accounts: National Income, Expenditure and Product, December Quarter 2013 (ABS cat. no. 5206.0)

The size of Australia's household debt compared with its income (household debt to income ratio) is not just high in historical terms, it is also high when compared with the household debt to income ratios of the G7 countries (i.e. Canada, France, Germany, Italy, Japan, UK and USA). For example, in 2012, Australia's household debt level was equivalent to 1.73 times Australia's 2012 gross disposable household income, whereas household debt in both Italy and Germany was less than a year's worth of gross disposable household income (at 82% and 93% respectively).

SIZE OF HOUSEHOLD DEBT COMPARED WITH ANNUAL INCOME(a)

in Australia, Canada, France and Italy

in the UK, Japan, the USA and Germany

(a) This household debt to income ratio is household debt at the end of the calendar year expressed as a percentage of gross disposable household income received during that calendar year.Source: Australian National Accounts: Financial Accounts, December Quarter 2013 (ABS cat. no. 5232.0); Australian National Accounts: National Income, Expenditure and Product, December Quarter 2013 (ABS cat. no. 5206.0); OECD Economic Outlook, Volume 2013 Issue 2

Loan repayments usually contain an interest component and an amount that reduces the loan principal. All other factors being equal, the higher the interest component the lesser the opportunity to reduce the loan principal and pay off the debt quickly. When interest payments represent a high proportion of disposable income it may be difficult to reduce debt at all.

For the December quarter 2013, the total amount of interest households paid on money they had borrowed was equal to 7% of the gross disposable income they received during the same quarter (household interest to income ratio). While this is currently higher than it has been during most of the past 50 years, it is clearly lower than what it had been at its highest point in 2008 (12%).

We can consider the sustainability of current levels of household debt by looking at the likelihood of risks such as sharp increases in interest and unemployment rates, significant declines in household income and wealth, and substantial falls in asset values.

Interest rates

At the end of 2013, three-quarters of all household debt was borrowing for housing,2 and housing interest rates are currently relatively low. Between June 1989 and March 1990, large bank lenders charged interest at an average of 17% per annum on their standard variable owner-occupied housing loans. In April 2014, large bank lenders were charging an average of just under 6% per annum on these loans, and even cheaper housing finance was available from other lenders. For example, the average interest rate charged by large mortgage managers on their basic variable owner-occupied housing loans in April 2014 was 5% per annum. Some smaller lenders and online banks were offering housing loan interest rates below 5% per annum in early May 2014.

In its December 2013 Mid-Year Economic and Fiscal Outlook (MYEFO), the Australian Government expected sustained low interest rates during the remainder of 2013-14 and in 2014-15.3 More recently, in April 2014, the Reserve Bank of Australia (RBA) foreshadowed a period of stability in interest rates.4

While the unemployment rate has been increasing over the past couple of years, it is currently well below levels associated with the recessions of the early 1980s and early 1990s. In April 2014, the RBA expected the unemployment rate to rise a little further in the near term.4 In December 2013, the Australian Government's MYEFO expected the seasonally adjusted unemployment rate to drift up to 6.25% by the June quarter of 2015.3

The present period of economic growth since the last recession in the early 1990s has generally been accompanied by increasing household income. For insight into why this trend has occurred see the Australian Social Trends 2007 article 'Purchasing power'.

Disposable household income per person continued to rise in real terms (i.e. faster than inflation) from the onset of the GFC in 2007 until mid 2012. Since then, it has decreased slightly. Looking ahead to 2014-15, in December 2013 the Australian Government's MYEFO forecast subdued wage growth.3 Looking further ahead, in November 2013 both the Australian Treasury5 and the Productivity Commission6 forecast lower rates of income growth over the next decade.

REAL(a) ANNUAL HOUSEHOLD INCOME(b) PER PERSON(a) All dollar values presented in this graph have been converted into December quarter 2013 dollars using the All Groups Consumer Price Index.(b) Gross disposable household income received during the previous year.Source: Australian National Accounts: National Income, Expenditure and Product, December Quarter 2013 (ABS cat. no. 5206.0); Australian Demographic Statistics, September Quarter 2013 (ABS cat. no. 3101.0); Unpublished projected resident population for 31 December 2013; Consumer Price Index, Australia, March Quarter 2014 (ABS cat. no. 6401.0)

Although real household wealth per person has not returned to late 2007 levels, it increased strongly during 2013, reaching $323,000 by year's end. This was more than double what it had been at the end of 1990 ($141,000 in December 2013 dollars) and well above its post-GFC low of $281,000 (in December 2013 dollars) at the end of March 2009.

Over the past 25 years, residential land and dwellings have accounted for close to half the value of all households' assets.2 In the December quarter of 2013, the average value of a residential dwelling in Australia was $539,400. In real terms, this was 7.7% higher than it had been in the September quarter of 2012 ($500,700 in December quarter 2013 dollars).

The share of banks' domestic housing loan portfolios that were either impaired, or at least 90 days overdue but well secured, edged lower over the six months to December 2013, to 0.6%. This percentage has declined from its 21st century peak of 0.9% in mid 2011, aided by low interest rates and generally tighter mortgage lending standards in the period since 2008.1,7 The percentage of impaired housing loans has fallen slightly over recent quarters; the rise in housing prices appears to have helped banks deal with their troubled housing assets, with a number of banks reporting a reduction in mortgages-in-possession. The total number of court applications for property possession declined in 2013 in NSW, Vic., Qld and WA.1

The total number of non-business related personal bankruptcies, debt agreements and insolvency agreements was also lower across most of Australia in 2013. Non-performance rates on banks' credit card and other personal lending, which are inherently riskier and less likely to be secured than housing loans, declined slightly over the second half of 2013 to around 2%, following an upward trend over the previous five years.1

Products such as home equity loans, redraw facilities and offset accounts are more popular now than in the 1990s. These types of loan products make it easier for households to build mortgage buffers, enhancing their ability to cope with income shocks.8

Many households have used lower interest rates to continue paying down their mortgages more quickly than required. As a result, the aggregate mortgage buffer (i.e. balances in mortgage offset and redraw facilities) has risen to almost 15% of outstanding balances, which is equivalent to around 24 months of total scheduled repayments at current interest rates. This suggests that many households have considerable scope to continue to meet their debt obligations, even in the event of a spell of reduced income or unemployment.1

Economic activity is often financed via debt in modern economies such as Australia's and this is the case for governments, households and corporations. A country's debt levels can be monitored and analysed over time using data published within the national financial accounts. The next release of Australia's national financial accounts, which will show financial flows between the various sectors of our economy during the first quarter of 2014, is currently scheduled to occur on the ABS website on June 26, 2014.

Data presented in this article are mainly from the Australian System of National Accounts (ASNA).

Trends and levels observed in ASNA data may differ from seemingly similar measures sourced from ABS Survey of Income and Housing (SIH) data. There are scope, definitional and methodological differences between the ASNA and the SIH in their measurement of the economic stocks (e.g assets, debt and wealth) and flows (e.g. disposable income) of households. For a detailed explanation and quantification of the main differences, see Appendix 4 of Household Wealth and Wealth Distribution, Australia, 2011-12 (ABS cat. no. 6554.0) and Appendix 6 of Household Income and Income Distribution, Australia, 2011-12 (ABS cat. no. 6523.0).

In the ASNA, households or the household sector comprises all persons, unincorporated businesses and non-profit institutions serving households (e.g. churches, charities, political parties and trade unions). Unincorporated businesses, whose activities are inextricably mixed with personal activities, are extensions of households. Non-profit institutions serving households are included because data are not available to identify their activities separately.9

An unincorporated business or unincorporated enterprise is a business in which the owner(s) and the business are the same legal entity, so that, for example, the owner(s) are personally liable for any business debts that are incurred.

In the ASNA, gross disposable household income is gross household income less income tax payable, other current taxes on income, wealth etc., interest on dwellings, consumer debt interest, interest payable by unincorporated enterprises, rent on natural assets, net non-life insurance premiums, social contribution for workers' compensation and other current transfers payable by households.

A real value is one that has been adjusted to remove the effect of general price inflation. In this article, all original dollar values from earlier periods have been converted into latest period dollars by applying All Groups Consumer Price Index numbers for the two periods. For a detailed explanation of how this is done, complete with examples, see Consumer Price Index: Concepts, Sources and Methods, 2011 (ABS cat. no. 6461.0).

Per person dollar values presented in this article have been calculated by dividing the published household sector aggregate dollar value for the particular stock or flow by the estimated resident population of Australia at the same time (in the case of debt and wealth) or at the end of the flow period (in the case of income). Household sector debt and wealth aggregates are published in Australian National Accounts: Financial Accounts (ABS cat. no. 5232.0), household sector income aggregates are published in Australian National Accounts: National Income, Expenditure and Product (ABS cat. no. 5206.0), and the estimated resident population of Australia at the end of each quarter (i.e. at the end of each March, June, September and December) is published in Australian Demographic Statistics (ABS cat. no. 3101.0).

The unemployment rate is the number of unemployed people expressed as a percentage of the labour force (employed plus unemployed).

A household's wealth is the value of its assets less the value of its liabilities.

A debt is an obligation which requires one unit (the debtor) to make a payment or a series of payments to the other unit (the creditor) in certain circumstances specified in a contract between them.

Non-performing loans are loans that are either not well secured and where repayment is doubtful, or loans that are in arrears but well secured.

An impaired loan is one that is not well secured and where repayment is doubtful.

A secured loan is a loan for which the borrower has pledged assets such as real estate, shares or motor vehicles as collateral, so that if the borrower fails to repay the loan the lender can sell the assets to recover the amount owed.